The 3 Lessons I Learned After Accidentally Buying a Liquor Store

No, I wasn’t binge drinking at the time. I wasn’t really shopping for a liquor store. I wasn’t even shopping for a bottle of wine. But, here I am … proud owner of a liquor license and a terrific selection of craft beers, pinot noirs and small batch bourbons….among many other standard liquor store offerings.

Since 2010 I’ve been investing in real estate in Pueblo, Colorado and when a commercial building with retail on the ground floor and multifamily residential on the second floor was listed for sale I went to take a look. I liked the building, especially the location in the heart of Pueblo’s Mesa Junction neighborhood. As I walked around with the owner, it became clear that the liquor business was being sold with the building.

Hmm. Intriguing. My college buddies would be so jealous.

So, deciding to roll the dice, I made an offer. I fully expected a counter-offer that wasn’t sufficiently attractive, allowing me to walk away and go back to business as usual.

With the building under contract I began due diligence. I remember thinking, before I ever contemplated the notion of liquor store ownership, retail liquor stores enjoy a tidy little monopoly. Must be nice. Well, yes and no. It’s not quite as easy as it sounds. Since taking ownership of the store I’ve learned a few things about the liquor business that might surprise you.

Lesson 1. The liquor business is highly complex. Retail liquor, at least in Colorado, is a fascinating business. Huge number of SKUs. The quantities of categories, brands, flavors, price points and size variations are mind-numbing. Talk about Big Data. Liquor distribution is heavily regulated in Colorado with a 3-tier system composed of manufacturers, distributors and retailers; each tier has its own set of rules and requires its own special license with an application paperwork trail that only a lawyer could love. Inventory is expensive and margins are thin, managing inventory and cash flow is extraordinarily difficult and SKU level demand is nearly impossible to forecast accurately. Running a small liquor store requires business acumen – accounting, operations, human resources, customer service, marketing, sales – the whole enchilada. If you were thinking that a liquor store is like an advanced lemonade stand you’re completely underestimating the task. This is good by the way. Communities need opportunities for individuals to learn how to run a complex business with full P&L responsibility.

Lesson 2. Distributors hold all the power. As a retail liquor store owner I am only allowed to purchase inventory from a licensed distributor. Seems reasonable to keep tabs on who’s moving liquor around the state. But, here’s the catch. Every licensed distributor has a complete monopoly on every product they sell. So, any self-respecting liquor store should have various sizes of Jack Daniels on the shelf, right? I think I’ll call around and see who has the best deal on a case of 750 ml bottles of Jack, compare prices/terms and place the order, right? Wrong. If you want to buy Jack Daniels or any other product whether it’s a brand of beer, wine or spirits, you have your choice of exactly one distributor who carries that product. So, negotiating price isn’t an option. The only possible way you can get any sort of discount is by purchasing large volumes. As a result, the distributors pass along more favorable prices to the mega-stores who can afford to purchase 100 case deals; if you’re a small liquor store you just have to bend over and take whatever price is offered. When I learned this was the way the system worked I was stunned. What? [fade to the Caddyshack scene with Chevy Chase talking to Danny Noonan, “Is this Russia? This isn’t Russia.”]

You mean to tell me that we aren’t allowed to shop around for a supplier who might provide better service, better prices or both? Nope. The Budweiser distributor welcomed us to the industry by requiring cash upon delivery for the first 90 days. No checks. No 30-day net invoice. Not even a money order. Cash on the barrelhead. Nice manners, Bud.

Lesson 3. Owning and operating a small liquor store can provide a comfortable income and job security but it’s no cash cow. If you read my About page you’ll see that I have a day job in a completely separate industry. I don’t work in the liquor store. I hired a manager to run the operation and she supervises a handful of employees who staff the store when she can’t be there. She’s paid a decent salary providing a reasonably comfortable living in Pueblo. We pay hourly employees a decent wage as well. It’s not lucrative but I’m willing to bet we pay better than comparable positions at local grocery or convenience stores. The store is humming along. We did a good bit of business around the holidays and customer traffic is steady. But here’s the thing. This business is not designed for an “absentee” owner because after payroll and inventory replenishment there’s not much left over. However, the setup is perfect for an owner-operator.

As an owner-operator of a liquor store you have roughly the same job security as a tenured college professor. The store could go under if you fail to compete effectively or if the market for liquor dries up somehow (just like a school could close or an academic department could be eliminated). And, your take-home pay will vary with some years better than others depending on volume. But, so long as you have customers who walk in the door, no one can really take away your job.

Sure, I wish the store was a huge cash cow; you know, pay myself a nice salary every month and do whatever I want all day. Sounds great in theory but as a member of the community I’m glad it’s not so easy because big corporate greed would quickly follow. It’s nice to have the owner behind the counter. Customer service is better. And, it’s nice that the liquor store provides a comfortable income. That way the owner is highly unlikely to sell booze to minors – there’s too much at stake to break the law for a few extra bucks. Mostly, it’s nice that a big company can’t swoop in and take over every liquor store in sight. In the name of low prices, they’d shut most or all of the small stores down and open newly constructed mega-locations on the outskirts of town where land is cheap and profit maximized, laying to waste neighborhood small markets within walking distance….sort of like what’s happened with the grocery industry.

This dispersed single-unit ownership system is better for the community because it provides economic activity in a variety of locations along with solid living wage jobs that can’t be readily outsourced or automated. More people have skin in the game and a strong incentive to take care of their stretch of sidewalk in the community. In fact, aside from the distributor monopolies and the cumbersome government licensing process, it just might be a model worth considering for distribution of other commodities, like fresh food.

36 Comments

Hi Kat – it’s hard to say. I think if someone is going out to do a big shop they are more likely to go to one of the big box liquor stores rather than to our small store. But for most of our customers the convenience of our location is a more important factor. Other customers come specifically to see our manager and benefit from her knowledge to get good wine or craft beer/spirits recommendations. Hope that answers the question for you. Best, Justin

Thanks for the info. My husband and I would like to buy or start one in a small northern colorado town. With the oil and gas influx the traffic would be good. I am an accountant and am looking to change. This would be my undertaking.

Hi Adam, the store area is 2600 sq ft with about half of that accessible to customers. We have 2 employees working during business hours but just 1 register. Not sure if that’s what you’re looking for – I can’t reveal financial information here. Best, JH

Hi – I’m thinking of just specialty beer (and maybe wine) shop in CA. License is *much* cheaper, but can’t make as much per sq. ft. of space, and will require substantial refrigeration. Do you think this model is viable? Or is hard alcohol required to make it profitable?

Hi Tom,
I don’t really have sufficient expertise to provide useful guidance here. What I will say is that, at least in Colorado, profit margins on liquor (hard alcohol) are quite a bit higher than they are for beer. I would imagine you would also lose a whole lot of revenue as beer aficionados may also need to grab a pint of Jack Daniels from time to time. Rather than focusing on specific product categories I would suggest focusing on a specific customer segment. Talk to beer aficionados and find out what they would want on the shelves. I’m guessing they would want to see some standard wine and liquor offerings for convenience. Hope this helps! Best of luck!
Justin

Grocery chains have been trying to change the liquor laws for years. The liquor lobby seems to have the upper hand, at least for now. If laws were to change, liquor store owners would need to innovate to survive. Some locations would have no chance.

Hi Ruben, it’s difficult to say and probably warrants a separate blog post. I’ve now sold the store and still own the real estate. The new store owner will probably exercise an option to purchase the real estate in 2015. When all is said and done I expect to have at least doubled my investment capital. Probably more. But my profit has more to do with buying the store + real estate at a good price than anything else. I didn’t make any money operating the store. If you’re looking for a buy/hold situation you have to be willing to work at the store as your regular gig for it to make sense. As a passive investor you can either make money by flipping, like I did, or by purchasing a higher volume store with more potential to generate regular cash flow. However, this latter option requires a much larger pile of cash up-front. Hope this helps. Best, Justin

Thanks you for this article i found if very informative. I am looking for a small business opportunity in NY. I understand this business isnt a cash cow and the margins are thin but you also describe is as stable and able to provide a comfortable living. Would you suggest this a a valid first time business owner opportunity? what percentage of your gross income results in owners cash? this is and example of a store for sale in my area does this seem reasonable?
Asking Price$199,000.00
Gross Revenues$589,862.00
Financing$ 199,000.00 Down and Sales Price does not include inventory
Owner’s Cash Flow$91,920.60

Hi David, glad my post was helpful! In your example, the asking price is about 33% revenue which is a bit high. Try for something in the 25-30% range so if you like what you see maybe offer $150k. If the owner is providing financing it will be more difficult to get a lower price. Another key factor is real estate – can you buy the real estate? If not, are good lease terms available, etc. Cash flow of $90k on a store doing $590k is solid and probably requires that you work a *lot* of hours. You could hire help if you’re willing to pay yourself less. I do think a liquor store is a decent first time business owner opportunity. Just be sure you have a good pile of cash in the war chest for start up expenses. You’ll make mistakes – some of them expensive – and you need a cushion. Think of it as tuition to be paid. As a reward, so long as the location is good, you’ll have job security most can only dream about. And 90k/yr isn’t a bad salary to go with it. Just don’t count on it in year 1. Hope this helps. Cheers, Justin

Good advice for those considering a liquor/wine store as a business. I have owned a liquor store/beer store/wine store going on 6 years. Retired from IBM at age 55 and have been operating this store ever since. My brother and I both put up 150.00 to buy this business. We have a long lease. I’m afraid the lease may last longer than my brother or I. My brother and his wife and I and my wife operate the store. My brother and I each draw 90,000 a year. Wives are not paid. We are in Texas and it never ceases to amaze me how consistent the revenue is from one year to the next. In our six years we have been very fortunate to have minimized the mistakes that most new business owners make. The one thing that really stands out is your statement, any liquor store owner is at the mercy of the distributors. How true it is.

Rickey – thanks so much for sharing your experience and thoughts! Congrats on retiring from Big Blue and moving to a situation where you have more control over your own destiny (aside from those darn distributors). Thanks also for sharing your purchase price (I assume you mean $150,000 each?) and annual draw. I’m sure this is a huge help for others considering a similar move. I went into my own venture with too little capital, underestimating the amount of money needed to accommodate proper inventory levels and cash position. Thanks again and best wishes, Justin

Hi Justin.
Thanks for your insight, it was very helpful. My husband and I currently own a 7-11 franchise in northern colorado but are considering leasing the building next to our store and opening a liquor store. (Unfortunately, I don’t think the real estate would be an option to buy) What advice would you have in terms of installing equipment? Do you think we should try to negotiate some of that cost into our lease agreement? (I’m also not sure what a good deal would be on leasing a commercial space, it’s not a very large space) Do you have a rule of thumb in terms of competition compared to the surrounding population? Lastly, can you educate me on what you can and can’t sell? (Soda,juice, crackers, limes?) Did you do any in-store beer/wine tasting at your store? If so how does the licensing work for that?
Thanks again!!

Hi Ashley! Could you carve out a portion of your existing 7-11 for liquor sales? That might be better. It’s possible under Colorado Liquor Laws. You just need separation between the two areas within the store. Doesn’t need to be a wall. You also need separate cash registers. But that’s it. Worth investigating. For lease negotiations, competition, non-liquor items, tastings, etc I will try to answer when I have more time. Let me know what you think about dividing the 7-11. Cheers, Justin

Hi Justin, you are a wealth of information, I wish I could add you to my pocket in our venture. We are selling a business in the next few months and looking to purchase a liquor store in Colorado Springs area and we would own/operator the business ourselves. We see a sea of liquor stores for sale and wondered why and if it would be a wise choice for us. We are both in our ‘upper” ok fine, top 40’s and are moving to Colorado where the weather is not as extreme as Minnesota. We have owned and operated our existing business for 10 years and neither one of us is afraid of putting in the time to succeed. What other experience and advice would you be willing to share that would help us decide if this is the right choice. We do not want to purchase a store that has a lease, we would want to buy one that has the building included in the sale. We would also be going into this business with a good savings for purchasing inventory as we know there is always a large investment in inventory and we would always pay our vendors at delivery.

Hi Penny – location is everything in this venture. You’ve already narrowed down to Colorado Springs but I think you should look carefully at the density of existing stores to assess competition before making any commitments. Maybe there are too many stores in the Springs and that’s why so many are for sale? Not sure. That would be a good question to answer. You can add me to your “pocket” for the transaction if you change your mind and target Pueblo instead. We need good business people with solid Midwestern values to help improve the economy in Pueblo. Plus your real estate dollar will go about twice as far as it would in Colorado Springs. Good luck! Best, Justin

Hi Tamara – I don’t know much about the subject but I think it depends on location and customer type. What sort of location? Downtown/urban? Or suburban shopping center? Who are your customers? Office workers grabbing a 12-pack on the way home from work? Retired/disabled stopping by for a regular half pint of cheap vodka? You don’t want to waste money advertising until you understand your core customer base and where they are coming from to visit your store. Once you better understand who you’re trying to reach it becomes an easier problem to solve. Hope this help. Cheers, Justin

Message from a french guy, reading your blog. Interesting to see how american people can discuss business and share experience. I have always thought that I’d love to work over there. Reading your post and comments make me think I should really try to!
Bonne continuation à tous
Cheers
Pierre

Hi, Justin
1)Looking into buying a liquor store in NorthWest of Denver. Gross is 1.6 mil, and the net to owner after all the expenses is $135,000. Asking price is 750,000 and not inlcuding inventory. 8 years on the lease left. Based on these numbers, how much would you offer? Do the numbers look healthy?
2) Although I am doing my due diligence such as requesting annual credit card statements, tax returns, P&L and inner computer generate reported to make sure that all match the 1.6 million figure or at least come close but any thing else you recommend or ideas that helps my due diligence to make sure those numbers are legitimate?
3) Store sells liquor and lottery but I also want to add cigarettes? Will that help with sale or is it worth it?

Any other recommendations that you might pass on to make sure I am making a good decision or something I need to watch out for? could be legality issues, competition etc.
Again thank you so much for your help!

Hi Romy,
(1) For a liquor store grossing $1.6 Million I would offer $400k and I wouldn’t pay more than $475k. Also, is the lease renewable at the end of 8 years? I would insist on an option to renew after the current term. How much for the inventory? You need to know what you’re getting and you should only be paying wholesale cost. You might also refuse to purchase any “dead stock”, i.e., inventory that’s just collecting dust and hasn’t moved in the past year or so.
(2) Tax returns should suffice. Find out what the breakdown is for Beer, Liquor and Wine. Beer is the least profitable category so, ideally, the store would do a strong % of sales in liquor and wine. If Beer is well over 50-60% your margins will be relatively thin. You might request to work the store alongside the owner for at least one full week to validate sales numbers. This time of year is slow but the store should be bringing in about $25k per week. Less than $20k and alarm bells should go off in your head.
(3) Adding tobacco is probably a good idea. At my store 10-15% of revenue was from tobacco sales so it can add a significant chunk. Plus it brings traffic. Add groceries and other convenience items is good too but you have to comply with State law which requires a separate cash register and a clear distinction between the retail space dedicated to liquor vs retail space dedicated to other sales.

There are lots of other factors. Competition is key, of course. So is parking, visibility, traffic flow, and on and on.

Hi Justin,
1)Buying a liquor store Southwest of Denver. Gross is 1.6 million from past 2 years, Net to owner after all expenses is $135,000 and 8 years left on the lease. Asking price is 750,000, inventory excluded. What would you offer? and lets just say if those above numbers are true, do you they look healthy?
2) I am doing my due diligence to make sure 1.6 mil is a legitimate figure by requesting annual credit card statements, tax returns, p&l and inner computer generated sales so I can match them. Any other ideas you can pass it on so I can verify the accuracy of the sale?
3) Store sells liquor and lottery, but i also want to add cigarettes and add groceries to boost the sale? Is that a good idea?
4) Anything else you can recommend for me to be aware of such as license, marketing or lease, competition?